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Sunday, September 28, 2014

Last Week, a friend of mine here in Singapore was talking to a bank salesman about a home loan. I also happened to join this discussion with the salesman who was representing a leading bank that
happens to give home loans for NRI’s from Singapore as well. During this
discussion, the gentleman happened to elaborate on many of the eligibility criteria
and with a little bit of digging, the rationale behind the same was also
touched upon. So, I thought, why not share these details with all of you…

Why this Article is Important

Buying a home is a
significant investment for most of us. Not all of us have enough cash in our
bank accounts to make a full payment for the house. So, inevitably we end up
taking up a home loan which is a 10 years or more financial commitment. Though
we think about points like our monthly income before availing this loan, we may
miss out on some of the finer aspects of the loan evaluation criteria and this
might adversely impact our loan eligibility. So, why miss out on our dream
home?

When should I do all
this?

This is a very tricky
question. You should start thinking about all these aspects of the loan
evaluation at least 4-6 months prior to you actually sign-up for the home loan.
Finding a good house is a lengthy process and for most of us, we identify a
good house only after a few months of search. So, the moment you start thinking
about buying a house, you must start thinking and planning for all these
aspects…

Step 1 – Review your
Credit Report

The first
and most important consideration for any Bank is the “Credit Report” of the
borrower. In India CIBIL is the entity that offers these credit reports. So, if
you apply for a loan (any loan) the first think the bank would do is, request a
copy of this report. A few weeks ago, I had written an article titled “Everything You Want to Know About Your CIBIL Credit Score- Explained!!!” which will help you understand what this credit score is and
how you can improve it.

Once
you have decided that you are going to buy a house, you should purchase your
credit report from CIBIL and review it to make sure that your credit score is
good. You must also review it to make sure that all the info in the report is
correct. If your credit score is at least over the 700 mark (the closer it is
to 900 the better) there is a good chance that your loan will get approved.

If you are someone who does not have any loans now, you can ignore this
step. However, if you have taken a few loans, then you must do this.

It would be a good idea to close-off all (or at least part) of your loan
commitments before signing up for the home loan. All banks will deduct your existing
loan repayments (EMIs) from your monthly income before calculating your loan
eligibility. Plus, the more the number of loans you have, the difficult it
would be for you to obtain a loan. So, better close out your loans before the
home loan agreement is signed.

Step 3: Review your
Bank Balance

Have you spoken to any
bank about a home loan? If you had, the bank would’ve asked you to submit at
least 6 months of your Bank Statement, from the bank account where your salary
is getting credited. (For NRI’s the NRE Account statement is also asked for,
over and above your salary account statement from the country where you are
employed).

You might be thinking,
am giving you my payslip, employment records etc but why am I being asked for
my bank statement?

Simple. The bank would
like to know your spending habits and also check if you maintain sufficient
balance to repay your loans. For ex: If you are availing a loan of 50 lakhs
that require you to repay Rs. 60,000/- every month, the bank would like to
check if you maintain sufficient balance. Someone who maintains an average of
50,000 rupees or more would have a greater probability of getting this 50 lakh
loan in comparison to someone who maintains only 5,000 rupees.

Step 4: Review your
Banking Habits

If you are someone who
has the habit of timely repayment of bills and dues, you can ignore this step.
If you are someone who issues cheques or has monthly EMI deductions from your
bank account but, do not maintain sufficient bank balance, you may need to
concentrate on this point heavily. Any bounced payment (Cheque/EMI/Bill
Payment) would adversely affect your loan eligibility. No bank would grant a
loan to a customer who has a history of missed payments. A Bank would expect
you to clean up your habits at least over the past 6 months to 1 year so that they
can trust you with a loan.

Step 5 – Review your
Documents

Most banks request the
same kind of documents from its customers for loans. The most important of them
would be:

Loan Application
(Filled-in with Photographs)

Address Proof
(Telephone Bill, Electricity Bill etc.)

Identity Proof (Passport,
Driver’s License etc.)

Latest salary slips –
At least 3-6 months

Tax Return Filings (Or
Form 16) for at least the past 3 years (The more the better)

Bank Statement – At least
6 months

In addition to the
above documents, you would also need to submit copies of all property papers
that you desire to purchase.

Tip: It is always
recommended to verify the property documents available with the seller before
entering into an 'agreement to buy'. Generally, banks do not process a loan
application without the 'agreement to buy/ sell'. If you are not confident on
the property documents, it is always advisable to consult a property lawyer
well in advance. The lawyers analyze the chain of the property and help you in
making the decision to buy or reject the property. They also help in execution
of the sale/purchase transaction.

Some Last Words:

Getting a home loan is
a lengthy process and banks would closely scrutinize your application before
granting you the loan because it is a huge commitment. If you were a bank and
someone is asking you for a 50 lakh loan, wouldn’t you closely evaluate the
loan applicants details? The more confident you are, the more comfortable you
would be to grant the loan – isn’t it?

So, as a customer, it
is our responsibility to make sure that we submit all the necessary artifacts to
improve the banks confidence.

Sunday, September 21, 2014

All of us work really hard and it would be unfair if our money/investments aren’t working as hard as we do. To force our money to work hard, it is inevitable that we consider the stock market. And, if you are novice investor, taking the mutual fund route is the best. So, if you are someone who is new to the stock market as well as Mutual Funds, this article will help you make up make up your mind and decide…

As always, if you feel some more of your Questions are still left unanswered, feel free to sound off in the comments section…

Before We Begin: Why this Article..

A couple of days back, a friend of mine who I have known for almost a decade pinged me. He was hearing a lot about our stock market being in a “Bull Run” Phase and wanted to take advantage of this momentum. He was very new to the stock markets and felt that going the Mutual Fund Route would be the best for him. During the discussion he suggested that, some of the questions he had would be useful to other blog readers who may be sailing in the same boat as he was. So, here we go…

As a new attempt – this article is structured in a Q & A or Conversational Format between me and my friend.

Anand: Hi Rajesh, sure da. Yes, Mutual Funds are the best choice for people like us who are busy with a regular day job and cannot track our investments on a daily basis.

Rajesh: Yes da. What route would you suggest? Do I need a lot of money to start investing in Mutual Funds?

Anand: No da, not required. You can start off with a very small amount.

Rajesh: Is it? What is the Minimum amount da?

Anand: It depends on the mutual fund da. Most funds would accept investments as small as Rs. 500 or Rs. 1000 (This varies from fund to fund) if you commit to Systematic Investment Plans (SIPs). I had written an earlier article about SIPs in April 2012. Click Here…

Rajesh: Oh, must I commit to an SIP?

Anand: Yes da. No matter what the market phase is (Bull or Bear), SIPs are the best choice for people like us because you can start with small amounts, it brings discipline to investments plus it helps us average out our gains/losses by investing every month.

Rajesh: Ok da. I have been going through many stock market websites. Am confused da. What website will give me clear cut ideas?

Anand: What is the bank with which you have a DEMAT Account?

Rajesh: I have XXXXX Bank DEMAT Account da.

Anand: Check their website itself da. Their DEMAT Account is one of the best in the Indian markets.

Rajesh: But, wont they recommend only their mutual funds?

Anand: No da. They CANNOT/WILL NOT. No Demat Account provider can recommend his/her funds only. It is against the laws set forth by SEBI. As a Demat Provider, they are expected to be neutral and put the customers interest in the forefront. So, they will recommend mutual funds from all fund houses (not just theirs)

Rajesh: Oh ok. What fund would you recommend for me?

Anand: It depends on the amount of risk you are willing to take da. How much money are you willing to lose?

Rajesh: What are you asking da? Am investing to make money da not lose.

Anand: No Rajesh. All stock market investments come with an inherent risk. There is always a probability that your investments will go-down in value. For ex: Now the stock market is at never before highs (27000 for Sensex and 8000 for Nifty). If for some reason the market tanks and goes down by 30% there is a chance that your investment will go down by an equivalent % or more as well… That is why I asked you, how much money you are willing to lose/risk.

Rajesh: Ok da. I want to invest in the stock market but don’t want to lose a lot of my money da.

Anand: Fund Classification – By Risk (High to Low)

Thematic/Sector Oriented Funds

Small/Mid-cap Funds

Diversified Equity Funds

Blue Chip Funds

Balanced Funds

Debt Funds

Rajesh: So, what would you recommend for me da?

Anand: The first 3 are extremely risky da. So, I wouldn’t recommend them for you. First tell me how much are you willing to invest each month.

Rajesh: Am thinking around 3000-4000 rupees per month da

Anand: Ok. Whatever is the amount you decide, split it into two and start off SIPs in two different Mutual Funds. Choose one Balanced Fund and one Blue Chip Fund.

Rajesh: Doesn’t a Balanced Fund Invest in the stock market?

Anand: Yes da, they do. But, they invest only around 50% in stock market instruments. The remaining goes into safe investments which means, around 50% of your investment is safe.

Rajesh: What is a Blue Chip fund da?

Anand: Blue Chip is nothing but a fancy term for Large Cap companies. Blue Chips are extremely large and successful companies that have a long history of profits. State Bank of India, Reliance Industries, ONGC, NTPC, ICICI Bank, HDFC Bank etc are some classic examples. There around 100 or so super large companies in our country and these mutual funds predominantly invest on such companies only. Even the ELSS sub category of mutual funds invest only in blue chips

Rajesh: What is the advantage of investing in blue chips?

Anand: Though the price of blue-chip shares may not go out of the roof like a small cap or mid cap company, nor will their price go down as fast as their smaller counterparts. Because of their size and profitability, investors will not panic much and their stock prices will remain stable even during tough times. This does not mean you wont make any losses, but the relative % or probability is lower in comparison to other sized companies.

Rajesh: Ok Da. Tell me two funds – one in blue chip and one in balanced category that I can invest in.

Thursday, September 11, 2014

With Inflation and Cost of Living going out of the roof these days, we are all striving really hard to Earn More or to Invest Wisely or to Pick up a Part-Time Job etc etc. All this is very good. Obviously, nothing can replace "More Income". However, there are a few simple tips that can actually help us reduce our expenditure which in-turn can result in "Additional Savings". The Idea behind this article is to suggest a few very simple, easy to follow Ideas that can really help us reduce our monthly expenses..Before we Begin: Many of the ideas here might sound like - "Aah, I already knew this" types. More importantly not all of us may have the luxury or options of following them due to certain constraints. So, browse through the list and try to implement as many as possible. A point to note here is that, only Ideas that can result in quantifiable cost savings are listed down here.

Idea No. 1: Eat at Home - More Often

In this current generation where both husband and wife are employed, either or both of them come home pretty late in the evening and end up dining outside. Though this is inevitable in many cases, at least try to make dinner at home on days you reach home on time. If you are someone who has the luxury of a "Home Maker Wife" then try to get your lunch packed. Your wife is anyways going to pack lunch for your kid(s) and I am pretty sure she would have absolutely no issues packing lunch for you as well. Some people have this illusion that carrying a lunch-bag makes me look aged. Trust me, if you try this out for a month and calculate how much you save at the end of the month/year - you will feel Awesome...

Savings:

Dining Out - For 2 Pax: Avg. Rs. 100/- per day.

Dinner @ Home At least Twice a Week: Rs. 1000/- saved per month

Lunch @ Office Canteen: Avg. Rs. 40/- per day

Getting Lunch Packed Dily: Rs. 1000/- Saved per Month

Idea No. 2: Always Pay your Bills - On Time

Most of your monthly bills like - TV, Internet, Phone, Credit Card etc come with hefty fines if you miss the payment deadline. Many of us are very busy and occupied with our day-to-day work and end up consolidating these payments maybe Once or Twice a month. This can actually result in missed payments and fines. You may not mind paying a 50 or 100 rupee fine for late payment once in a while but if this is a recurring pattern, imagine all the money you are wasting unnecessarily?All we need is a little organization. For the next couple of months, track the dates when all your bills come-in and make a TO-DO List that would remind you when each bill is due. I do this and trust me, the first couple of months was very hard because I had to literally check my letter-box everyday but now I know when each of my bills is due and it has been over a year since I actually missed a bill payment.

Savings: Quantifying this is actually difficult but lets assume one bill getting missed every 2 months and that bill comes with a Rs. 200 fine for late payment (Like most credit cards).

Missed Credit Card Payment: Rs. 200 fine

5 Missed payments in a year: Rs. 1000/- wasted

With our Credit Score being given so much more weightage these days, missed payments can significantly dent your credit history and cause problems in future when you want to go for a Home Loan or Car Loan..

Idea No. 3: Always Track your Overdraft Account

These days many banks are offereing Overdraft facility for customers who hold "Salary Account" with them. An overdraft account is nothing but a facility where the customer can actually withdraw/use more funds that he actually has in the account and then repay once funds area available (More or less like a credit card). However, every time you dip into overdraft money, you are charged a fixed fee (Around 200 to 500 rupees). Plus, the money you use is chargeable at hefty interests (Around 10-12% per annum or more). On top of this, you are charged a yearly "Annual Fee" as well. So, firstly, if you are someone who always maintains enough balance in your bank account and would not need this Overdraft facility, "Surrender" this option. You can save easily around 1000 rupees or more in Annual fee every year. If you are someone who needs this overdraft facility, try to limit the number of times you dip into the overdraft account.

You may think I am crazy to actually suggest this as an Idea but sadly, many of us not are fully aware of what is the minimum balance requirement in our bank account. Some banks expect 5000 rupees and some expect 10000 rupees. Most banks charge you penalties & fees for "Not Maintaining Sufficient Balance" in your account which is a few hundred rupees for every instance your balance goes below this threshold. On top of this, if you issue cheques or set up recurring bill-payments that bounce due to insufficient funds banks hcarge hefty penalties (At least 500 rupees or more). Not to mention the hassle and head ache of chasing down the person who we owe money and explaining the error hoping for the fact that they wont legally sue us. In case of recurring bill payments, add the penalties for missed payments plus they too will charge you for bounced payments.

A simple oversight error where you actually forgot that your credit card bill is due on a certain date will cost you Rs. 1,400/- rupees plus a damaged credit history.

Idea No. 5: Dont Just Use Any ATM. Use Only Your Bank's ATM

Gone are the days when banks offered you the privilege of using any banks ATM Machine if you have a "Salary Account" with them. These days banks charge you for using other bank ATM's and this fee ranges from Rs. 50 to Rs. 200/- per transaction. Many banks offer a certain number of free transactions every month/quarter but keeping track of how many times we actually used another banks ATM machine is an added headache. So, the best option would be to use only the ATM machine of the bank with which you have your account. Of course this idea isnt really applicable when you are in an emergency kind of situation (On a vacation/trip in a town where you are not able to find your banks ATM) but as far as possible, lets try to avoid this fee.

Savings:No. of Transactions in Other Bank ATM's each month: At least 2-3

Fee for using that ATM: Approx Rs. 200 per month

Amount Wasted per year: Rs. 2400/-

Idea No. 6: Avoid Credit Cards with Annual Fee

These days most banks issue Credit Cards that are "Free for a Lifetime" which means No Annual Fee. But, sometimes banks add a "Catch" to the card member agreement where the card isnt actually Free. They say - Free If you Spend at least Rs. 50,000 in a year or some sort of condition. If you fail to meet that condition, you will be charged a hefty annual fee (Usually around Rs. 1000 or more) Then there are those cards that charge you hefty annual fees just because those cards are considered cool to own. Many people apply for credit cards from certain establishments just for showing off as a "Status Symbol". For Ex: Owning an American Express credit card would cost you around Rs. 5000 in annual fee each year. That is a lot of money. You can actually get a free-for-life credit card from most major banks in India that are co-branded with either Visa or MasterCard that will offer you just as much features like Amex at little or no cost. Of course, you cannot flaunt your Visa credit card because just about everyone would have it...

Savings:Annual Fee for one credit card: Avg. Rs. 1000

No. of Credit Cards Owned: 5

Amount Saved by Switching to Free Credit Cards: Rs. 5000

Idea No. 7: Use your Landline Phone

In this day and age of Mobile phones, we make almost all our calls using our mobile phone. But, we invariably have a land-line phone because your Internet Service Provider usually bundles the landline phone and internet connection. This landline usually comes with its share of "Free outgoining calls/minutes" and in some places like Singapore, calls made via landline are unlimited FREE. Irrespective of what mobile phone you use (Prepaid or Postpaid) the number of minutes available for outgoing calls is limited. In case of prepaid the phone will get disconnected when you cross that minutes barrier and in case of Postpaid the amount you will pay beyond those initial minutes is hefty. Why not use your landline to make some calls? we can save a lot of money this way..

One of the things many of us fail to do is - Keeping our Automobile (Bike/Car) in Top condition. We usually use it until the point that it breaks down (or is on the verge of breaking down). Though this is ok, the fact is that, by servicing our car/bike regularly we can accomplish three things:1. The Ride Quality will always smooth and chances of unexpected breakdowns or problems is reduced signifiantly2. Though the regular service cost runs into a few hundred rupees each time, by keeping the car in good condition, you can save a lot of money on unwanted replacement of spares due to improper servicing. For ex: By replacing your engine & Gear oil every 3 months, you can keep your engine and associated components in prime condition. Yes, this will cost you a few hundred rupees each time but imagine having to replace your Engine or Gearbox?3. By maintaining your vehicle in proper condition, it will not unnecessarily consume fuel. With the price at which we get Petrol & Diesel, saving every liter of petrol counts. By properly maintaining your Car, your cars mileage will improve by at least 1-2 km per liter. If you drive 500 kms per liter, you would have earlier had to fuel 50 liters (@ 10 kmpl). Now, you will just have to fuel 42 liters. 8 liters worth of Petrol/Diesel saved right away.

Amount Saved on Fuel: Rs. 500/- per month (or more depending on how much you drive)

Idea No. 9: Switch Off All Electronic Appliances - Once Used

Did you know that when you hit the "Power Off" button on your TV Remote and leave, your TV continues to consume around 10-15% of electricity in the background? In fact most electronic devices consume about 10% electricity while in stand-by mode. Your laptop, Mixer, Microwave, Dishwasher, Washing Machine etc - all of them consume electricity when the "Power Switch" is still "ON". So, if you are done watching TV, dont just power off using remote, switch off the power supply. Do the same for other devices also.

Savings:Average Electricity Bill Per Month: Rs. 2000/-

Amount Saved by Switching Off: Rs. 200/- per month

Amount Saved in One Year: Rs. 2400/-

Idea No. 10: Pay-Off Loans & Credit Card Debt As Soon As Possible

Any loan that you are repaying includes two components - Principal and Interest. The principal is the actual amount that you borrowed which you are repaying. But, the Interest is the fee's that you are paying for the loan. So, the earlier you repay the loan, the lower the interest you are repaying. Sometimes, it may not be possible to pay off our credit card in one shot. In such cases the card issuing bank will charge us an Interest until the date that you fully repay the original outstanding due. So, try to repay this debt within the first 2-3 months because the interest is usually calculated from the date of purchase and on the full transaction amount even if you are repaying a part of it every month. So, if you get any sudden influx of funds (Ex: Bonus) pay-off loans and outstanding debt.

Think of it this way - The money you are paying as Interest is nothing but Money you are giving the bank to become rich. You have a duty to repay the loan/amount you borrowed but it is also your right to repay quickly with as little Interest as possible. So, paying interest over a long duration of time is as good as throwing away money...

Some Last Words:Some of these Idea's are pretty straightforward and are easy to implement. Some of these ideas may not be feasible for you. For ex: you may not have an Overdraft Account which means Idea no. 3 is useless for you. Similarly, if you dont own a Car or Bike, Idea No. 8 will be useless for you. Irrespective of how many Ideas you can follow, each of them will result in sizeable cost savings which you can utilize for other essential expenditures..Happy Saving Money!!!

Friday, September 5, 2014

This term - "Wilful Defaulter" has been making rounds for the past week especially because one of the richest men in India Mr. Vijay Mallya was tagged as a "Wilful Defaulter" a few days ago. I have been wondering for a while now - Why aren't any banks pressuring Mr. Mallya to repay the thousands of crores worth of money he owes them. If a common man fails to repay a loan (or credit card outstanding) that's worth just a few thousand rupees, he is put through tremendous hardships including jail time and/or banks taking possession of their property/assets to reclaim their money. So, if for just a few thousand rupees if someone has to endure all this, what about someone who owes a few thousand crores...

With Banks declaring Mr. Mallya as a Wilful Defaulter, things have taken an interesting turn because Mr. Mallya has declared that he is going to contest this tag of being named a "Wilful Defaulter" in court.

The purpose of this article is not to analyze whether there is any legal merit in this whole situation because honestly - I am No Lawyer. But, what we can do is, try to understand what is this Wilful Defaulter tag and how it would affect the person who has been given this tag...

So, Who is a Wilful Defaulter?

As per the official definition from Reserve Bank of India (RBI) a wilful defaulter in one who as a borrower has the ability to pay, but is unwilling to pay.

If I owe 50,000 rupees towards my credit card but for some strange reason I don't want to pay my bill even though I have more than enough money to repay, the bank that issued this credit card to me can declare me as a "Wilful Defaulter". Plain and simple - isn't it?

Can a Bank just declare someone as a Wilful Defaulter - All by Themselves?

No, definitely NOT. Banks follow an elaborate procedure, as laid down by the Reserve Bank of India, before declaring somebody as a wilful defaulter. Such cases are looked into by a committee of higher functionaries headed by the executive director and two GMs/DGMs of the bank.

So, What is the purpose of this whole exercise where you tag someone as a Wilful Defaulter?

The first and foremost purpose is to "Name and Shame" the individuals, who even though have the means to repay their debt are intentionally holding-off from doing so. As part of this process, the bank will publish photographs of defaulters and other details in newspapers and at notice boards of bank branches.

Talk about someone who is popular and easily identifiable being declared a defaulter in all of the banks branches across inda along with their photo? Or worse, what about a half page Ad on any of the top news papers with their photo? Wouldn't that be extremely shameful?

Anyways, the wilful defaulter tag is not only a naming and shaming exercise, but could also entail significant criminal and financial liabilities. Obviously, if someone were to just display photos and call people defaulters, they may not care much...

So, what are the limitations a Wilful Defaulter faces in India?

According to the RBI, Banks can do the following:

1. Write to securities market regulator (SEBI) to debar these Wilful Defaulters from accessing the securities market. So, if Mr. Mallya wants to raise debt (Via bonds) or go public (For one of his new companies), he may be prohibited from doing so.

Impact: You may be wondering, does this really matter? Definitely Yes because, the securities market is the biggest sources of funds for companies - either via shares or bonds and if this is blocked, companies may find it really hard to expand...

2. Banks will not grant additional loan/credit facilities to such wilful defaulters. In case of fraud, such persons can be debarred from institutional finance for floating new ventures for 5 years.

Impact: Not all companies run on cash. They use floating credit accounts to pay their day-to-day expenses and then offset the same once they receive the cashflow out of their sales. So, by blocking any new/existing credit facility, banks can significantly dent the companies ability to run properly.

Impact: The individual could be jailed and his/her assets taken over by the bank to recover their money. Of course, this will take a long time due to the limitations of our judicial system but can be fast-tracked if the authorities feel the need to...

4. Companies that have Wilful Defaulters as part its "Board of Directors" will be prevented from accessing the Securities Market

5. Banks Will Not Do Business with any company where a person who was declared as a Wilful Defaulter is a member of the board of directors

Impact: Companies will now be cautious on who they assign as a Board of Director. In this case with Mr. Mallya, he is a member of the board of 4 companies and all 4 of those companies may end up with significant impact unless he gives-up his position in the Board...

Some Last Words:

As you can see, being declared a Wilful Defaulter is not only a shameful situation, it will have significant impact on all the businesses where the individual is a part of. So, people will try their best to make sure they arent tagged as one. This is the reason why Mr. Mallya is presently contesting the banks declaration in court.

Every Investor is looking for the next hot stock tip. A stock whose price will double or triple in a few months. However, one of the often ...

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